Can a Solvent Company File for Bankruptcy

The short answer is yes, but that does not mean they will succeed. In order for a company to file for bankruptcy, they must be either cash flow insolvent balance sheet insolvent. Furthermore, a court will be the one to make this ruling. Filing for bankruptcy can technically be done by any company, but a court could very easily throw their claim out if it does not have merit.

Cash Flow Insolvent

In order for a company to be cash flow insolvent, they must prove they are unable to pay their debts as they come in. A company would be considered cash flow insolvent if they brought in $1000 a month in revenue but had liabilities each month of $2000.

Balance Sheet Insolvent

A company is considered balance sheet insolvent when their total debts surpass their total assets. This means that if a company has assets (both liquid and nonliquid) valued at 1 million dollars but its debts are equal to more than that total.

Can you be one but not the other?

Yes, it is possible to be insolvent in one case but not the other. A company may be cash flow insolvent but still have a large number of nonliquid assets worth more than its liabilities. On the other hand a company may also have more debt that asserts, but still, have enough positive cash flow to be able to pay its immediate debts. Obviously, this may not be the smartest long-term decisions, but many companies that hold long-term debt operate in this manner.

What does Insolvency mean for Bankruptcy?

It is important to know the difference between the two. Bankruptcy is a legal court order that determines how assets will be handled and how creditors will be paid. Insolvency, however, is simply a state of economic distress. Just because one of your customers is insolvent, does not mean they will file for bankruptcy. On a similar note, just because your customer files for bankruptcy, they may not be insolvent.

A solvent company can file for bankruptcy, but this does not guarantee that it will be approved by the court. They must be able to prove one of the two cases of insolvency before any bankruptcy agreement is made.